6 Overlooked Risks After a Health Care M&A
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Public-private partnerships (P3s) are an effective way to get complex and expensive transportation infrastructure projects done at a time when political will to invest public funds fall short.
While the approach has been successfully utilized for many different projects, overall adoption remains limited. Out of the United States’ total annual infrastructure spend of $1.2 trillion, roughly $20-25 billion goes toward P3 projects, or about 2 percent.
Part of what has kept P3 to this niche is a dependence on toll-based revenue structures. But new revenue approaches such as Availability Payments could make the model work for a much broader scope of projects, including social infrastructure like hospitals and public schools.
“The insurance community, construction community, and finance community all have an interest here. These three industries could get aligned and work together to help promote P3s as a potential alternative solution for what needs to get built and rebuilt and improved in the next five to 10 years,” said Thomas Grandmaison, executive vice president, Energy and Construction Industry Leader, AIG.
P3s come with a set of both benefits and risks, but new financing approaches combined with an evolving political climate that seems to favor infrastructure investments could be the dawn of a P3 Golden Age.
Developments in finance structures and insurance coverage make P3s more attractive for both public and private partners.
Roads built under a P3 model have typically generated revenue from tolls. The financing of these projects is therefore based on traffic forecasts that estimate the number of cars using the road every day, over a period of 30 to 50 years.
And when those forecasts are inaccurate, the entire project is put in jeopardy. In 2016, SH 130 Concession Co., the private entity that financed, constructed and maintained State Highway 130 — a 41-mile toll road connecting Austin and Seguin in Texas— filed for bankruptcy. The project cost $1.3 billion. SH 130 tried to attract drivers with a high speed limit of 85 mph and an alternative route around other gridlocked highways, but motorists ultimately opted for longer commutes that required no toll payment.
In California, the 10-mile South Bay Expressway suffered the same fate, declaring bankruptcy in 2011. Same for the privately operated Indiana Toll Road, which went bankrupt in 2014.
That’s why availability payments have become increasingly popular.
With availability payments, the public entity issues a periodic payment of a predetermined amount to the private partner as long as the project is available for its intended use at the expected performance level. In this arrangement, the public partner collects any tolls and retains the risk that revenue may not meet expected levels. These arrangements help to attract private partners who don’t want to take on traffic risk, but also allows public sponsors to retain some ownership and control over the road going forward. Availability payments can also enable non-transportation P3 projects, including water treatment plants, ports and public facilities like hospitals and schools.
“There is no shortage of interest in private financing,” Grandmaison said. “There’s plenty of capital out there, and now potential financiers can feel more secure in their investment. The availability payment option often provides the difference between investment grade, and non-investment grade debt, dramatically reducing the cost of debt and increasing the number of potential investors.”
Insurance coverage plays a part in that security as well, and carriers have been pushed to build creative and flexible solutions to accommodate the size and complexity of P3s. Current trends and P3 project structures need sureties providing alternative solutions that incorporate liquidity elements that can address both concessionaire and rating agency concerns.
“As P3s become more prevalent, builder concessionaire teams and brokers will be asking the insurance market to think more holistically about how separate coverages can be brought together in a coordinated and aligned fashion to make the buying process more streamlined,” Grandmaison said.
There may be multiple large contractors working on a P3 project, and none wants to take the entire program onto their balance sheet. Same goes for the mix of private investors involved. And then there’s the public entity that wants full insurance protection even though they take a back seat in terms of project management and execution.
“You’re creating a six-headed monster as the owner or sponsor of the insurance program,” Grandmaison said. “It’s a more complex risk assumption than the traditional setup where the public entity is responsible for insuring construction, but takes on operation of the project through a separate program.”
Complete and coordinated coverage for all of the risks involved in complex projects alleviates fears — held by both public and private parties — that one entity will be more exposed than their partners, or that risk will be allocated unfairly. For P3s to be executed smoothly, it’s critical to have insurers involved that have the full breadth of experience and capabilities to fill this need. In addition, not all insurers are comfortable with project terms that are often longer than 5 years (sometimes 8-10 years), and providing operational coverage during course of construction or post construction.
AIG is one of few insurers that can provide all of the coverages traditionally needed for construction projects like workers’ compensation, general liability, builder’s risk, inland marine, environmental, professional liability, surety and even some ancillary coverage like cyber and kidnap and ransom.
Despite their big benefits, P3s also come with significant hurdles. Even with a shifting government agenda that prioritizes infrastructure, local political will can still be difficult to muster.
If a P3 project doesn’t pan out, taxpayers end up paying the balance. Local governments sometimes struggle to justify such costly projects that potentially place their constituents’ wallets at risk. To overcome that hesitance, political leaders want to be assured that their private partner has the capacity to stay with a project over its long lifespan.
“One of the challenges we’ve seen here in the States is that Departments of Transportation want to ensure that the companies that are contracted to keep the project running for up to 30 years actually remain in place,” he said. “There is hesitance to transfer that ownership over to a party that may want to cash out as soon the market shifts.”
Of course, having comprehensive insurance coverage alleviates fears for public sponsors as well.
“AIG is really a full service carrier that can provide everything a customer might need on a project-specific basis,” Grandmaison said. “AIG has been in the market of flexibility and creativity for years and will continue to be so.”
The future certainly looks promising for P3, and the insurance industry looks poised to face any new challenges it brings.
To learn more about insurance solutions for P3 projects, visit http://www.aig.com/business/insurance.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.
Working at Dominick’s Finer Foods bagging groceries. Shortly after I was hired, I was promoted to [cashier] and then to a management position. It taught me great responsibility and it helped me develop the leadership skills I still carry today.
R&I: How did you come to work in risk management?
While working for Hyatt Regency McCormick Place Hotel, one of my responsibilities was to oversee the administration of claims. This led to a business relationship with the director of risk management of the organization who actually owned the property. Ultimately, a position became available in her department and the rest is history.
R&I: What is the risk management community doing right?
The risk management community is doing a phenomenal job in professional development and creating great opportunities for risk managers to network. The development of relationships in this industry is vitally important and by providing opportunities for risk managers to come together and speak about their experiences and challenges is what enables many of us to be able to do our jobs even more effectively.
R&I: What could the risk management community be doing a better job of?
Attracting, educating and retaining young talent. There is this preconceived notion that the insurance industry and risk management are boring and there could be nothing further from the truth.
R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
In my 20 years in the industry, the biggest change in risk management and the insurance industry are the various types of risk we look to insure against. Many risks that exist today were not even on our radar 20 years ago.
R&I: What insurance carrier do you have the highest opinion of?
FM Global. They have been our property carrier for a great number of years and in my opinion are the best in the business.
R&I: Are you optimistic about the US economy or pessimistic and why?
I am optimistic that policies will be put in place with the new administration that will be good for the economy and business.
R&I: What emerging commercial risk most concerns you?
The commercial risks that are of most concern to me are cyber risks, business interruption, and any form of a health epidemic on a global scale. We are dealing with new exposures and new risks that we are truly not ready for.
R&I: Who is your mentor and why?
My mother has played a significant role in shaping my ideals and values. She truly instilled a very strong work ethic in me. However, there are many men and women in business who have mentored me and have had a significant impact on me and my career as well.
R&I: What have you accomplished that you are proudest of?
I am most proud of making the decision a couple of years ago to return to school and obtain my [MBA]. It took a lot of prayer, dedication and determination to accomplish this while still working a full time job, being involved in my church, studying abroad and maintaining a household.
R&I: What is your favorite book or movie?
“Heaven Is For Real” by Todd Burpo and Lynn Vincent. I loved the book and the movie.
R&I: What’s the best restaurant you’ve ever eaten at?
A French restaurant in Paris, France named Les Noces de Jeannette Restaurant à Paris. It was the most amazing food and brings back such great memories.
R&I: What is the most unusual/interesting place you have ever visited?
Israel. My husband and I just returned a few days ago and spent time in Jerusalem, Nazareth, Jericho and Jordan. It was an absolutely amazing experience. We did everything from riding camels to taking boat rides on the Sea of Galilee to attending concerts sitting on the Temple steps. The trip was absolutely life changing.
R&I: What is the riskiest activity you ever engaged in?
Many, many years ago … I went parasailing in the Caribbean. I had a great experience and didn’t think about the risk at the time because I was young, single and free. Looking back, I don’t know that I would make the same decision today.
R&I: What about this work do you find the most fulfilling or rewarding?
I would have to say the relationships and partnerships I have developed with insurance carriers, brokers and other professionals in the industry. To have wonderful working relationships with such a vast array of talented individuals who are so knowledgeable and to have some of those relationships develop into true friendships is very rewarding.
R&I: What do your friends and family think you do?
My friends and family have a general idea that my position involves claims and insurance. However, I don’t think they fully understand the magnitude of my responsibilities and the direct impact it has on my organization, which experiences more than 9 million visitors a year.